Can Amyris Walk Its Risky Tightrope and Reward Investors?

Synthetic biology pioneer Amyris (NASDAQ: AMRS  ) and its investors discovered several errors in the initial approach to start and ramp the company's wholly owned facility in Brotas, Brazil. While those problems would have been exposed with or without a pristine balance sheet (Amyris wasn't scaling biology with an engineering mind-set) and the company appears to be on the right track now, Amyris continues to carry the financial baggage from past operational inefficiencies. Sure, well-established partners and potential customers such as Total (NYSE: TOT  ) and Boeing (NYSE: BA  ) have emerged to support the company's development and potential revenue growth, but the balance sheet remains the biggest risk to investors.

Amyris disclosed worrisome information in its latest 10-K: The inability to secure additional financing and collaboration revenue in 2014 could adversely affect the company's business plans and its status as a going concern. It's clear that the company is walking a risky tightrope and it plays out quite simply. Should management string along enough financing and collaboration deals and plug away with operations at Brotas, Amyris will meet 2014 guidance for cash flow positive operations and the stage will be set for years of incredible growth. Should management fail to secure adequate financing or any significant portion of its collaboration inflows, Amyris will face more dire circumstances -- perhaps with long-term consequences.

Do the potential benefits outweigh the risks? Or should investors avoid a risky and unstable Amyris?

Real progress
The company successfully restarted operations in the first quarter at Brotas after planned downtime resulting from the sugarcane interharvest period in Brazil, which was used to upgrade process equipment. The enhancements have allowed Amyris to achieve production runs better than those achieved in 2013, which saw farnesene production costs of just $3.50 per liter at the time. That's still way too costly to produce bulk volumes of fuel for Total, and even too expensive to produce niche fuels for Boeing, but management understands it won't achieve profitability with fuel products. The major discrepancy in product revenue and cost of revenue will continue to reflect that reality until more profitable products increase their presence in the company's portfolio.

That reality may be closer than most investors think. An average selling price of $9.84 per liter of product was achieved in the first quarter, although that includes the new fragrance molecule patchouli oil (completely separate from farnesene) that has unknown production costs. Nonetheless, the company expects to achieve similar selling prices -- equivalent to $9,000 per metric ton -- across its platform for the next several years, which would enable gross cash margins greater than 60%.

Can Amyris hit its lofty expectations for product revenue next year and beyond? Source: Amyris.

Several other goals look very achievable for 2014. Product sales are still guided to hit the target range of $40 million to $45 million (squalane will generate $15 million to $18 million, patchouli will generate $9 million to $10 million, and the balance will be various fuel products), operating expenses continue to plunge (a 14% reduction was witnessed in the first quarter compared to the year-ago period), and cash increased to $49 million. Investors will also be comforted to know that Amyris has recorded at least $59 million in collaboration inflows in each of the past three years, which seems to make its goal for the year quite attainable. Unfortunately, continued product development is contingent on meeting specific collaboration revenue goals.

Real danger
CEO John Melo told investors that, as of March 31, the company had successfully contracted over 50% of its targeted $60 million to $70 million in collaboration inflows for the year. That sounds great at first blush, and a strain engineering collaboration with the world's largest chemical company announced at the beginning of the second quarter will certainly help, but investors remain unaware how much was already due to Amyris. It appears that the market is giving more weight to the "what ifs?"

Should Amyris fail to receive $60 million in collaboration revenue, fail to achieve $40 million in product sales, fail to find enough cash to fund operations or payback its debts, and/or fail to lower operating expenses to $85 million for the year (a 25% reduction compared with last year) then it probably won't achieve cash flow-positive operations. In a worst-case scenario, Amyris would have to slash personnel and curtail research and strain development operations, which could have a significant effect on its ability to reach its long-term goals by the end of the decade.

Strain development has come a long way to enable 2-4 new commercial strains each year. Source: Amyris.

Amyris sneaked the following financial nugget into its quarterly press release but did not mention it on the call or in its presentation: "Based on favorable market conditions, [Amyris is] exploring potential opportunistic financing of up to $100 million in the form of convertible debt." I would say the market conditions aren't so favorable right now, but securing an additional $100 million in cash before the end of the year would certainly be advantageous, albeit dilutive, for investors. The extra cash would allow the company to pursue several high-priority growth opportunities and put the company in an unfamiliar position: relatively stable financial footing, if only for a few quarters. Let's face it: A debt offering with established backers would be better than bankruptcy.

What should investors do?
Investors need to acknowledge the risk of an investment in Amyris. The financial circumstances are less than favorable and could have long-lasting and painful consequences in a worst-case scenario. I believe the potential opportunities for the company's synthetic biology platform are well within reach -- it just has to walk the tightrope in 2014 to open up multiple high-growth opportunities. That's why I'm invested in the company (I'm also young enough to take on a little more risk than most). If you believe the financial risks are greater than the long-term rewards in the cosmetic, high performance material, fragrance, and fuel markets, then you shouldn't invest. But if you feel comfortable taking on a high-risk investment for the potential to capture incredible long-term gains, then you may be able to expose a small piece of your portfolio to Amyris' platform.

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